State-owned entities need to be backbone of SA economy
As SA drifts towards globalisation, a vibrant SOE sector is crucial to enhance innovative capacity and productivity growth
The words of University of Johannesburg academic Pádraig Carmody remain true — SA is battling with a compromise between globalisation and social democracy. The economy is rapidly globalising. All this is happening in an era where our economy is in recession, with rising government debt levels and poorly performing and failing state-owned entities (SOEs).
For a transition economy such as SA, the time has come for government to seize the moment and gradually introduce the necessary reforms into our SOEs.
Our SOEs need to be effective instruments in generating our country’s economic fortunes, and as such be the backbone of the economy. However, any SOE reform policy needs to align to the country’s economic developmental agenda for meaningful economic reforms and effect. This is crucial as the government needs to create necessary conditions in these SOEs to effect change.
Critically, tampering with the SOEs can lead to significant economic, social and political consequences. Without doubt SA needs to build a market-driven economy with the SOEs leading the charge. This will only be possible if we bolster the efficiency and competitiveness of the SOEs.
SA will fail if the country’s SOE reform programme fails to modernise areas such as management structures, governance and institutional reforms, organisational performance and oversight structures. Accordingly, we have to shift our SOE focus towards a more commercial orientation. This includes turning the SOEs into effective instruments for economic advancement.
Our government needs to loosen its operational control over the SOEs and create space for management to have more autonomy in day-to-day operations. The primary objective of the SOE reform process is to reduce government interference in the daily business operations, provide management with autonomy and delegate full business management responsibilities to executives.
Consequently, there must be a proper separation of powers between shareholders and management. This can lead to agency problems, but only if the shareholder and management share different goals. There is an inherent risk that management may abuse their powers for self-gain. This is more pervasive within the SOE environment. This practice requires a well capacitated and independent board of directors and a vigilant shareholder.
The form and character of our SOEs’ corporate structures and governance mechanisms need to change from a political orientation towards a more economy-focused approach. The SOEs must run on commercial terms similar to private entities. Critically, corporate governance reforms are internal governance structures and standard operating procedures that guide management decisions must be used to hold them accountable. As such these SOEs need to be run efficiently through a clear corporatisation plan.
The key to the renewed push for a broad-based reform programme is the need to curb the worsening financial performance of our SOEs. As a result, their contribution to the state’s revenue coffers is negligible if nonexistent. Instead their survival has been guaranteed by government through financial bailouts. Most of our SOEs have experienced a major setback in the last few years — a total pause in their economic-oriented approach leading to haemorrhaging of their profitability and prospects. This has exposed the inefficient and structurally bankrupt SOE sector, which is riddled with weak corporate governance structures.
The response to the failure of our SOEs is coupled with the failure to take responsibility and a dismal failure to hold those in charge to account. To remedy this situation our SOEs require well capacitated and independent boards motivated by good corporate governance principles and with a determination to discharge their duties and responsibilities to high ethical and moral standards. Our SOEs are in need of board structures with capacity to play an effective oversight role over managerial processes and decision-making that affect operational and overall strategic direction of the entities, including leverage and capital allocation decisions.
The monopolistic nature of some of our strategic SOEs has reduced their market competitiveness. These SOEs need to be exposed to robust competitive market forces. SA needs to build a system that will guide its SOEs towards corporatisation and business competitiveness. Government needs to set strategic targets and monitor the implementation progress through boards and shareholder activism instruments. Such decisions must be driven by commercial objectives.
Another crucial aspect in reforming SOEs is ensuring that the entities are profit-oriented. The legacy of mismanagement, loss-making and a lack of competitiveness must be replaced by shareholder vigilance and a clear government policy that outlines its objectives for the SOEs. Any policy instrument government sponsors must make it easier to assess the performance of SOEs, and their operational and strategic outcomes.
Without doubt our SOEs play an important role in our economy. But a significant large number of them are infested with inefficiencies a lack of innovation and with gloomy growth prospects. As SA drifts towards globalisation, a well-developed and vibrant SOE sector is crucial in enhancing our innovative capacity and productivity growth.
In the long run, SA could bolster its macroeconomic strategy by implementing the necessary SOE reforms and restructuring these entities so they remain effective instruments for our national developmental agenda. State control of SOEs needs to be reviewed and possibly reduced over time by bringing in private investment. Our government needs to reflect deeply on its role as the sole shareholder and direct player in the economy.
Consequently, the implementation of the SOE reform programme will carry unique risks and uncertainties. As such, our political Masters will need to tread gently in pursuing such reforms to minimise any political and economic ambiguities. The outcome of these reforms, if implemented successfully, will have a profound effect on our domestic economy and should shape for the better our SOEs’ contribution to the country’s developmental agenda.
• Wonci is CEO at Kogae Rainbow Investment Holdings and a senior partner at Kogae Advisory Partners.
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